llc vs s-corp for your colorado business: the real tax math
Every new business owner hears it from someone: "You should be an S-corp, it saves taxes." Sometimes that's true. Sometimes it costs more than it saves. The difference is arithmetic, so let's do some.
first: an llc is not a tax status
The LLC is a legal wrapper — liability protection, formed with the Colorado Secretary of State. By default a single-member LLC is taxed exactly like a sole proprietorship: all profit lands on your personal return, and all of it is subject to self-employment tax (15.3%) on top of income tax. The "S-corp question" is whether to file an election that changes how that same LLC is taxed.
what the s-election actually does
With an S-election, you become an employee of your own company. You pay yourself a reasonable salary — which is subject to payroll taxes — and take the remaining profit as a distribution, which is not subject to self-employment tax. The savings are the 15.3% you don't pay on the distribution slice.
the break-even math
Say your business nets $120,000 and a reasonable salary for your role is $70,000. The remaining $50,000 of distributions avoids roughly $7,650 of self-employment tax. Against that you must weigh the new costs an S-corp creates: payroll processing, a separate corporate tax return (1120-S), possibly higher accounting fees and state filings — typically $2,000–$4,000 a year all-in. At $120k of profit, the election clearly pays. At $40k of profit, where a reasonable salary consumes nearly everything, it usually doesn't.
Our rough rule: the S-election starts earning its keep somewhere around $60–80k of consistent annual profit — but "reasonable salary" varies by industry and the IRS does check, so the right answer needs your actual numbers.
what trips people up
- Electing too early, then netting a loss — all paperwork, no savings;
- Setting an indefensibly low salary, which invites IRS attention;
- Forgetting that S-corp owners can't deduct health premiums the same way without the right payroll setup;
- Missing the election deadline (generally 2 months and 15 days into the tax year you want it to apply).
get the real answer in one sitting
Bring us last year's numbers (or this year's projections) and we'll run both scenarios side by side — election costs included. If the S-corp wins, we set up the payroll and file the election; if it doesn't, you just saved yourself a few thousand dollars of unnecessary structure. More about our business tax services →
